"My aspiration is to see Fukuoka emerge as a premier international hub"

Sustained by the lifting of COVID-19 restrictions, Japanese real estate land prices jumped at the fastest rate they have in 15 years leading into 2023. Attracted by this performance against the valuation of the JPY along with very low interest rates, foreign investment poured into Japanese real estate. Coldwell Banker Richard Ellis (CBRE) reported that there was a 45% uptick in 2023 coming off the back of tailwind investment for Singapore in logistics and warehousing as well as North American consortium investment. Considering the global macroeconomic situation, why is Japan currently such an attractive investment point for real estate?

The Japanese real estate market is distinguished by its remarkable stability and predictability. Despite potential increases in interest rates, we anticipate a corresponding rise in rental prices. This dynamic ensures the maintenance of an attractive yield spread for investors. Additionally, inbound tourists and long-term residents still perceive the current pricing for hotels and accommodations as relatively affordable. This perception indicates a substantial capacity for incremental price increases, thereby enhancing revenue potential without adversely affecting demand.

While this has attracted a lot of attention, it has also attracted a lot of criticism in recent months. The first fear of investors looking at Japan is the fear of rising interest rates, and this has been multiplied by the move away from the negative policy as well as the fact that the JPY continues to devalue against the USD. Many fear that with the continued devaluation the Bank of Japan (BOJ) will be forced to intervene. There is also a risk of oversupply in certain areas, specifically when we talk about offices and hotels due to large projects being completed in urban centers. How realistic do you believe these threats are?

We anticipate a gradual increase in interest rates, with an estimated rise of approximately 0.25% within the first year and potentially reaching 0.5% by the second year. This gradual adjustment allows for better financial planning and stability within the market. Regarding the issue of oversupply, it is important to note that the cost of construction has significantly increased, approximately 1.5 times higher than it was two or three years ago. This surge in construction costs is likely to temper the development of new office spaces and hotels in the foreseeable future, thereby mitigating the risk of oversupply and ensuring a balanced market.

Japan is experiencing inflation for the first time in decades, and this is already having a positive effect on rent levels. We also saw the biggest labor union rise in salaries; 5%, the biggest raise since 1990. Despite this, there are apparent challenges such as the cost of raw materials going up, something that is hitting construction and will have an impact on new builds, maintenance, and repairs. Looking at the short-to-medium term, how do you expect inflation to impact your business and the real estate sector as a whole here in Japan?

It is really a double-edge sword. Indeed, the rising construction costs have presented challenges for Fukuoka Jisho as a developer. This increase has undeniably impacted our development projects by raising the overall cost structure.

However, with JPY 200 billion in assets, the rise in construction costs has also substantially increased the value of our existing buildings, resulting in a significant increase in their market value.

Unlike most other cities, Fukuoka is actually increasing in population year-on-year, and this is largely due to its attractiveness to young families as well as young professionals. Of course, it is also a strategic location being close enough to Tokyo while attracting tourists from destinations like Taiwan and Korea. What makes Fukuoka currently such an attractive place to live, and in terms of investment opportunities, why are people pouring into Fukuoka?

Japan's extensive urbanization has led to a highly saturated society, particularly in major metropolitan areas such as Tokyo. However, there is a growing awareness and appreciation for maintaining a healthy work-life balance among the population. As a result, many individuals are seeking to escape the relentless traffic congestion and high living costs associated with urban centers like Tokyo.

Fukuoka has emerged as a popular alternative destination, offering a more relaxed lifestyle where city and nature coexist at an affordable cost of living. The city is renowned for its culinary delights, providing residents and visitors with access to fantastic food. The city's infrastructure also supports a more sustainable and healthy mode of transportation, with many locations easily accessible by bicycle. This combination of natural beauty, affordability, excellent cuisine, and recreational amenities makes Fukuoka an attractive choice for those seeking a balanced and fulfilling lifestyle.

From your point of view, what do you believe are the most interesting investment opportunities in the Fukuoka area over the next five years?

The appeal of Fukuoka's city center is undeniable, and we are observing a pronounced trend towards centralization across various construction projects. For our company, acquiring prime central land is of paramount importance.

When it comes to the Tenjin Business Center, you took a unique approach with a global perspective. A competition was held for five architectural firms, some of which were foreign-based. With this type of project, what was the vision you had and what kind of wider esthetic are you looking to implement when it comes to Fukuoka’s development? What enhancements did foreign architecture firms bring to the project in the planning and pre-construction stages?

In Japan, we currently lack office spaces akin to the Magnificent Seven’s—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—whose offices are renowned for their free and open working environments. I have personally visited the Google's offices in Singapore. Inspired by these examples, we are committed to creating more open and free workspaces with ample common areas, emulating the innovative environments of the Magnificent Seven.

Our ongoing project, the Tenjin Business Center Ⅱ, is designed with a variety of amenities, including a sauna, gym, and lounge. The idea is to foster a sense of community where people can gather for social activities, such as enjoying a drink together on Friday evenings. Our goal is to enhance the overall experience within the building, incorporating a European design aesthetic rather than adopting a typical West Coast USA style. This approach aims to blend functionality with a touch of elegance, creating a more enriching and engaging work environment.

Fukuoka Jisho is exploring the frontier of the workplace by enhancing workers’ health and productivity through shared amenities

Fukuoka City has been designated as a special district by the Japanese government, offering various support measures for startups. On this backdrop, a consortium of companies together with Fukuoka City launched Fukuoka Growth Next, a platform to provide various support for entrepreneurs in order to accelerate their companies’ growth and to develop a start-up ecosystem. What makes Fukuoka attractive to start-ups? And how have you tailored the Tenjin Business Center to the needs of startups?

As a representative of Fukuoka Growth Next, I am proud to highlight our strong collaboration with the Fukuoka City government and the proactive leadership of Mayor Takashima. This level of governmental engagement is quite unique in Japan and significantly bolsters our initiatives. One notable success story emerging from our efforts is the QPS Research Institute, which recently completed its initial public offering (IPO) with an impressive market capitalization of JPY 150 billion. This achievement underscores the potential of technology cultivated at Kyushu University.

Our partnership with Fukuoka City aims to nurture these technological innovations and transform them into thriving startup businesses. At the Tenjin Business Center Ⅱ, we have dedicated 3,900 square meters specifically for startups, providing them with the necessary space and resources to grow. Additionally, we are constructing a seven-story building at Kyushu University Hospital designed to attract and support life-science startups. These initiatives are part of our broader strategy to create a dynamic ecosystem that fosters innovation and entrepreneurship in Fukuoka.

Can you imagine Fukuoka in 2034, what would you like the city to look like ideally?

I envision Fukuoka in 2034 as a city where rapid economic growth harmoniously coexists with the enhancement of its residents' quality of life, fostering a more refined and fulfilling way of living. When we consider cities like Mumbai, which have experienced significant growth, we often see that such rapid development can lead to challenging living conditions. In contrast, Fukuoka maintains a remarkable balance between development and livability, a balance I am confident will continue to flourish. Fukuoka's strategic urban planning and emphasis on sustainability ensure that as the city grows, it also enriches the lives of its inhabitants.

This balanced approach to urban development not only supports economic progress but also prioritizes the well-being and satisfaction of the community. As we move towards 2034, I believe Fukuoka will stand as a model city, demonstrating that it is possible to achieve rapid growth while simultaneously enhancing the overall quality of life for its residents.

Japan has more than 90 airports, or an average of more than two per prefecture. This has led many to believe that the country needs to consolidate its air terminals to improve efficiency. How do you see the development of airports for the development of the Kyushu region?

Fully leveraging the existing airports in Kyushu—specifically Fukuoka, Saga, and Kitakyushu—is crucial for optimizing the region's air travel infrastructure. However, the strategic allocation of these airports for specific purposes is equally important. For instance, designating Saga Airport as an international hub while allocating Kitakyushu Airport for domestic flights could yield significant benefits. Such an allocation strategy would not only streamline operations but also reduce waiting times for passengers by distributing the traffic load more efficiently. Moreover, it would facilitate an increase in the number of flights, enhancing overall connectivity and convenience for travelers.

The COVID-19 pandemic and the aftermath were a transformative time for the office segment. With the popularization of work-at-home and flexible offices, companies are now asking for more modular office designs as well as satellite Tenoffices to accommodate workers’ needs. Fukuoka’s office sector has been very resilient with vacancy rates lower than Tokyo and practically any other big city around the world. How do you see the evolution of office utilization moving forward and how is your company responding to the needs demands for office spaces?

Currently, the Fukuoka office market vacancy rate stands at approximately 5%. However, with an increase in supply, we anticipate the vacancy rate could rise to around 8%. This rise in vacancy is likely to result in a reduction in rental rates by about 10%. Despite this potential decrease, the Tenjin area commands the highest rental rates in Fukuoka. We have successfully increased rents in Tenjin by 25% over the previous highest rates in the city. Therefore, even with a projected 10% reduction in rents, we would still get to keep higher rents than ever before.

Our differentiation strategy centers on creating office spaces that emulate the open and free environments seen in the offices of the Magnificent Seven. These spaces are designed to be more open and collaborative, setting them apart from traditional office buildings. This unique approach not only enhances the working environment but also adds significant value to our properties, making them highly attractive to modern businesses seeking innovative and flexible office solutions.

Could you tell us what your expectations are for the hotel segment moving into 2024 and 2025? What differentiates your hotel brand FORZA from your competitors?

Our hotel business is currently thriving, with high levels of revenue per room. We are also witnessing a growth of 25% compared to the pre-COVID period, which underscores the strong performance and appeal of our properties. Once the return of Chinese tourists is in full swing, we have high expectations for a significant boost in our occupancy and revenue once they return.

A distinctive feature of the FORZA hotel is the incorporation of advanced Japanese electronics, offering our guests an exceptional experience with the latest gadgets. These include automatic closets, state-of-the-art massage chairs, and assisted steamers, providing a unique and luxurious stay. By integrating these modern conveniences, we enhance the comfort and satisfaction of our guests, setting our hotels apart from conventional accommodations.

In 2021, modern logistics facilities only represented around 10% of all warehouses across Japan. To address this gap, developers entered the market in force. On top of the rise of e-commerce, demand for warehouses is expected to come from the transportation, postal and logistics industries, which must address driver shortages caused by the recent revision of labor standards, which will limit overtime working hours, as well as shortages of in-warehouse workers. Which areas and facility types will you be focusing your investments on?

With the imminent opening of TSMC’s new factory in Kumamoto, we foresee a significant surge in demand for logistic facilities that can support Kyushu’s expanding semiconductor and industrial sector. Currently, there is a noticeable lack of such advanced logistical spaces in the vicinity of the TSMC factory.

Over the past four years, rental rates for these specialized spaces have risen by 20%, reflecting the growing demand and value of high-capacity, technologically advanced warehouses. By continuing to innovate and expand our offerings in this area, we aim to support the region's industrial growth.

Fukuoka Jisho was established in 1961 and soon became one of the leading developers in the Kyushu region. From a personal point of view, what has been your favorite development project?

Canal City Hakata stands as a testament to my father's (Mr. Enomoto, the company’s founder) vision and creativity, embodying the essence of American pop culture. It is indeed a masterpiece that showcases his dedication and innovation in urban development.

On a personal level, the projects that I find most impressive and hold closest to my heart are the Tenjin Business Center and the Nexus Ohori Park.

The Tenjin Business Center represents a significant milestone in our company's journey, blending modern amenities with a vibrant community space. Shohei Shigematsu of OMA was responsible for the architectural design, and Gwenael Nicolas of Curiosity for the interior design. On the other hand, the Nexus Ohori Park  reflects our commitment to creating living spaces that are not only functional but also aesthetically pleasing. These projects encapsulate our vision of blending innovation with timeless design, making a lasting impact on Fukuoka’s urban landscape.

Tenjin Business Center

Fukuoka Jisho’s traditional strength is in commercial, residential, hotels, and logistics, but we also know that you are expanding into new asset types, for example, data centers, R&D facilities, and renewable energy projects. Could you tell us about these new asset types and your vision for them?

From TSMC’s establishment in Kyushu, we have gleaned valuable insights into the region's strengths, particularly its abundant water and electricity resources. These natural advantages are pivotal, and we are strategically leveraging them by developing renewable energy generation sites and AI data centers.

Despite the fact that construction costs have escalated to approximately 1.5 times higher than before, these types of projects are capable of absorbing such increases through elevated rent prices. The demand for sustainable and technologically advanced facilities justifies the higher costs, ensuring that these investments remain financially viable. By focusing on renewable energy and cutting-edge data infrastructure, we are not only capitalizing on Kyushu's inherent strengths but also contributing to a more sustainable and technologically forward-looking future.

Locations like Kumamoto show large resources of geothermal energy, which is of course one of Japan’s most underutilized renewable strengths. Can you comment on how your company can utilize such a source of renewable energy without impacting tourism?

We are currently undertaking the construction of a geothermal plant in the Kumomato area, drilling 1,000 meters deeper than typical onsen streams to access vapors from deeper within the earth. This approach allows us to harness more sustainable and potent geothermal energy. Our business model includes a commitment to social responsibility, with a plan to return  a portion of the revenue generated from this project to the local community, thereby supporting local development and engagement.

Our vision extends beyond energy generation. We aim to transport a portion of the geothermal energy produced in Kumamoto to power the Tenjin Business Center. This initiative not only ensures that the energy used in the building is sourced sustainably but also provides transparency in our energy usage practices.

Additionally, we plan to host the agricultural fair at the entrance of the Tenjin Business Center. This event will serve to bridge the local agricultural community with the urban business environment, fostering a stronger connection between rural and central regions. It will also provide an opportunity to showcase and promote local agricultural products, enhancing the community's visibility and integration within the city's economic framework.

You recently begun a partnership with SORABITO, offering digital construction machinery rental service. Why did you decide to do this project and are you looking for more diversification in the services you offer?

We consider our tenants and clients as business partners, so whenever they start a new product or new business, we look to support them through investment or business collaboration.

Japanese households hold more than 2,100 trillion yen of assets, but more than half is held in cash. To unlock this source of capital and promote investments, the Government recently released a revamped version of the Nippon Individual Savings Account, a tax-saving investment scheme. What products are you developing to target Japan’s retail investors?

Personally, I do not maintain any cash savings; instead, all my assets are invested in stocks. To many Japanese people, the past decades have been lived under a deflationary environment, so stock investments did not always appear to be the best option. However, as the market shifts and inflationary trends take hold, investing will become increasingly attractive to Japanese people.

To facilitate smaller-scale investments and mitigate these concerns, we offer both our Fukuoka REIT. This financial instrument enable individuals, both international and domestic, to invest in the burgeoning Fukuoka market. By providing these options, we aim to democratize access to real estate investments, allowing more people to participate in and benefit from the region's growth.

Over the past year, Japanese equities have performed historically well, bringing the Nikkei 225 to break the JPY 40,000 barrier in March 2024. In contrast, the performance of the JREIT market has been more restrained. How do you explain the difference in performance between equities and JREIT? Do you believe that the JREIT market can close the gap?

It is true that with the increase in interest rates, there is a common perception that JREIT (Japanese Real Estate Investment Trust) yields would decrease. However, it is crucial to understand that companies have the capability to raise rents at a rate higher than the interest rate, especially during inflationary periods. By clearly communicating this potential and outlining the path to achieving higher rents, we can effectively attract investors back to real estate investment.

Beyond the JREIT market, there are various real estate segments that I believe Fukuoka will soon catch up to. When it comes to residential homes for high-net-worth individuals, for example, it is noteworthy that Fukuoka’s highest rental rates are currently only about one-third of the highest rates in Tokyo. However, this disparity is expected to narrow in the near future. As Fukuoka continues to grow and develop, the demand for luxury residences will likely drive rental prices upward, gradually closing the gap with Tokyo.

Fukuoka Jisho has a number of group companies. What synergies are you able to create among your group companies and how does having your own private REIT allow you to create an integrated revenue model? Can you explain what are some of the advantages of having that within the actual structure itself?

Fukuoka Jisho itself employs 180 individuals, but when including our subsidiaries, the total number of employees exceeds 1,500. Fukuoka Jisho is primarily focused on developing businesses, while our group companies manage and operate the businesses that have been established.

This scale is significantly greater than that of other real estate companies in Japan, which typically have only a few members investing in Fukuoka, or international funds that are beginning to explore opportunities in the region.

Currently, Fukuoka is experiencing a growth trend, and we are actively contributing to its development by leveraging Fukuoka Jisho’s capital, which exceeds JPY 200 billion. When combined with the Fukuoka REIT and our private REIT, this amounts to approximately JPY 500 billion in total capital. By fully utilizing these financial resources, we aim to generate substantial returns for our investors.

Imagine that we come back on the very last day of your presidency and have this interview all over again. What goals or dreams do you hope to achieved?

Fukuoka aim to position itself as Asia’s gateway, yet in reality, it faces challenges in achieving the same recognition and status as Tokyo. However, the establishment of TSMC’s new semiconductor fabrication plant marks a significant turning point, signaling a shift in the region’s economic landscape and global importance. This development has the potential to transform Fukuoka, enhancing its appeal and strategic relevance on the international stage.

By leveraging the city’s strategic location, coupled with continued investment and development, I am confident that Fukuoka can achieve this vision. As my tenure as president progresses, my aspiration is to see Fukuoka truly emerge as a pivotal Asian gateway and a premier international hub.

For more information about Fukuoka Jisho, visit: https://fukuokajisho.com/en/